The RIA business model is growing by leaps and bounds, and advisors thinking of joining this world or otherwise seeking independence have a variety of options to consider. But they also need to take a number of precautionary steps before making the leap, according to Lizzie Warner, vice president of business development and transition for Cambridge Investment Research.
Warner talked about the RIA space during the Invest in Women conference sponsored by Financial Advisor on June 22. During her presentation in Atlanta, called “A Time for Change: Starting, Joining, or Leaving an RIA,” Warner outlined the options available and steps that need to be taken to accomplish a successful transition.
Assets managed by RIAs have tripled over the last decade, and the channel continues to grow at about 12% per year, which makes it one of the fastest-growing channels in the financial services industry. The options available to aspiring RIAs are to go with a broker-dealer as an RIA, to be a stand-alone RIA or to split the financial planning and asset management functions under an RIA, Warner said. The last is the least common choice.
Advisors contemplating a change need to hire an attorney and hire a consultant. “I can’t stress the second one enough,” Warner said. Then they must appoint a chief compliance officer, whether it is themselves or someone else, and register with the appropriate state organization or with the SEC, depending on the size of the firm they are creating. Those with less than $100 million in assets under management can register on the state level, while those with more than $100 million must register with the SEC.
A number of documents must be created to form an RIA, including a privacy policy, a code of ethics and a policies-and-procedure manual. “Violations of the written policies and procedures of a firm are the most common failures of a firm that we see,” Warner said.
Advisors should also create a business continuity plan (which is required by the SEC to protect clients), a cybersecurity plan (also required by the SEC) and a compliance manual.
“A consultant can help you with all of these,” Warner said.
Other things are optional but are important to the success of a new firm, she said, including the selection of the right custodian and the selection of risk analysis software.
The brand name you choose, the website design and even the color of the logos and website are important, Warner said.
“I encourage you to utilize social media, and, once you start, this is not something you want to quit,” she said. Likewise, a new firm should develop a user-friendly client portal, because clients today want their information available without making a phone call.
A well-thought-out strategy should be developed for a firm to present the value proposition of the advisors to potential clients.
The key to the success of any transition is to think of all the possible outcomes and potential problems ahead of time. Whether the acquiring firm and the one to be acquired have the same culture is an aspect to explore in advance, Warner said. Also, do the technologies of the two firms mesh?
The compensation and benefits for the owners and staff of the acquired firm need to be set out in writing, she added.
“Do you own your own clients, or do they become clients of the firm?” is also a crucial question, she said.
Joining, leaving or starting an RIA is a complicated process that requires detailed planning in advance, Warner cautioned.
Cambridge is a broker-dealer and consulting firm based in Fairfield, Iowa.